Windstream's Dividend Is Good For 2014, Can The Yield Remain Over 12%?

| About: Windstream Holdings, (WIN)

WIN just had their Q4 conference call and gave their guidance for the year. Some points I have on negative articles I have read and some additional other points:

**Most Important** "Windstream expects to generate adjusted free cash flow of $775 million to $885 million, resulting in a dividend payout ratio ranging from 68 percent to 78 percent for the year."

TRANSLATION: The company just said that the current dividend amount is expected to be supported throughout the year -- the increase in the potential payout ratio -- up to 78% will be considered if free cash flow comes in at the lower end of guidance. It would be unusual and quite surprising for a company with a fairly predictable, recurring business to suddenly change this. Next fall people will rightfully question the viability of the dividend in 2015, but the company is communicating that this year's payouts are expected to continue on at existing rates.

1) EPS is not the proper operating performance indicator to review for levered companies (those with meaningful debt). Some variant of EBITDA is the best measure. They use OIBDA -- operating income before depreciation and amortization.

2) Their margins are stable and revenues were up modestly

3) As the author states, their common shares outstanding has risen, but only by 2% over the last 2.5 years -- hardly enough to dilute the existing shareholders badly on the dividend.

4) They are reducing the overall debt outstanding and also restructuring the debt -- as in reducing the interest charges associated with the debt. This is good for free cash flow.

5) Short interest of 15% is expecting them to cave like peers and cut the dividend-not likely in 2014. So do you hold onto the short and pay out dividends on the short position for the next 4 quarters or take a break and revisit in the fall? I think I know the answer.

6) If the company can convince investors there is, and execute, a stable revenue and cashflow model the next two years, the dividend may be fine for the next 2 years. If this is the case, the stock will unlikely languish with this kind of current yield.

Once people analyze and incorporate this outlook and start to think about the probability of 2015 dividends and cash flow (economic earnings) being flat or unchanged, I can see the stock rallying modestly. Shareowners now could easily see a 20% price increase to over $9 plus the dividends for a 20%+ CAGR some time over the next two years. People will question the dividend intensely again as summer is ending so get ready for another round of uncertainty, but for now, this time it is different!

Disclosure: I am long WIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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